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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended MARCH 31, 2004
Commission File Number 333-88577
NORTHERN BORDER PIPELINE COMPANY
(Exact name of registrant as specified in its charter)
Texas 74-2684967
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
13710 FNB Parkway
Omaha, Nebraska 68154-5200
- ------------------------------- -------------------------------
(Address of principal executive (Zip code)
offices)
(402) 492-7300
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]
1 of 16
NORTHERN BORDER PIPELINE COMPANY
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement of Income -
Three Months Ended March 31, 2004 and 2003 3
Statement of Comprehensive Income -
Three Months Ended March 31, 2004 and 2003 3
Balance Sheet -
March 31, 2004 and December 31, 2003 4
Statement of Cash Flows -
Three Months Ended March 31, 2004 and 2003 5
Statement of Changes in Partners' Equity -
Three Months Ended March 31, 2004 6
Notes to Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 15
ITEM 4. Controls and Procedures 15
PART II. OTHER INFORMATION
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
------- -------
OPERATING REVENUES $83,307 $79,892
------- -------
OPERATING EXPENSES
Operations and maintenance 9,065 8,919
Depreciation and amortization 14,510 14,489
Taxes other than income 7,913 7,845
------- -------
Operating expenses 31,488 31,253
------- -------
OPERATING INCOME 51,819 48,639
------- -------
INTEREST EXPENSE 10,221 11,819
------- -------
OTHER INCOME (EXPENSE) 159 (86)
------- -------
NET INCOME TO PARTNERS $41,757 $36,734
======= =======
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
------- -------
Net income to partners $41,757 $36,734
Other comprehensive income:
Change associated with current period
hedging transactions (402) (389)
------- -------
Total comprehensive income $41,355 $36,345
======= =======
The accompanying notes are an integral part of these
financial statements.
3
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 46,005 $ 28,732
Accounts receivable 35,165 33,687
Materials and supplies, at cost 4,812 4,818
Prepaid expenses and other 1,537 2,267
---------- ----------
Total current assets 87,519 69,504
---------- ----------
NATURAL GAS TRANSMISSION PLANT
Property, plant and equipment 2,437,925 2,438,816
Less: Accumulated provision for
depreciation and amortization 860,221 847,061
---------- ----------
Property, plant and equipment, net 1,577,704 1,591,755
---------- ----------
OTHER ASSETS
Derivative financial instruments 17,657 16,648
Other 12,929 13,402
---------- ----------
Total other assets 30,586 30,050
---------- ----------
Total assets $1,695,809 $1,691,309
========== ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 23,047 $ 22,637
Accrued taxes other than income 28,824 28,947
Accrued interest 12,775 10,717
---------- ----------
Total current liabilities 64,646 62,301
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 765,544 821,498
---------- ----------
RESERVES AND DEFERRED CREDITS 5,024 5,072
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 3)
PARTNERS' EQUITY
Partners' capital 855,795 797,236
Accumulated other comprehensive income 4,800 5,202
---------- ----------
Total partners' equity 860,595 802,438
---------- ----------
Total liabilities and partners' equity $1,695,809 $1,691,309
========== ==========
The accompanying notes are an integral part of these
financial statements.
4
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 41,757 $ 36,734
-------- --------
Adjustments to reconcile net income to partners to
net cash provided by operating activities:
Depreciation and amortization 14,601 14,580
Reserves and deferred credits (48) (9,373)
Changes in components of working capital 1,599 1,487
Other (156) (124)
-------- --------
Total adjustments 15,996 6,570
-------- --------
Net cash provided by operating activities 57,753 43,304
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant
and equipment ( 282) (1,894)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution from partners 65,000 --
Distributions to partners (48,198) (41,767)
Issuance of long-term debt -- 22,000
Retirement of long-term debt (57,000) (28,000)
-------- --------
Net cash used in financing activities (40,198) (47,767)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 17,273 (6,357)
Cash and cash equivalents-beginning of period 28,732 25,358
-------- --------
Cash and cash equivalents-end of period $ 46,005 $ 19,001
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized) $ 8,298 $ 11,007
======== ========
Changes in components of working capital:
Accounts receivable $ 962 $ (5,018)
Materials and supplies 6 (13)
Prepaid expenses and other 729 645
Accounts payable (2,032) 4,661
Accrued taxes other than income (123) 284
Accrued interest 2,057 928
-------- --------
Total $ 1,599 $ 1,487
======== ========
The accompanying notes are an integral part of these
financial statements.
5
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CHANGES IN PARTNERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
TC NORTHERN
PIPELINES BORDER ACCUMULATED
INTERMEDIATE INTERMEDIATE OTHER TOTAL
LIMITED LIMITED COMPREHENSIVE PARTNERS'
PARTNERSHIP PARTNERSHIP INCOME EQUITY
------------ ------------ ------------- ---------
Balance at December 31, 2003 $239,171 $558,065 $ 5,202 $802,438
Net income to partners 12,527 29,230 -- 41,757
Change associated with current
period hedging transactions -- -- (402) (402)
Contributions from partners 19,500 45,500 -- 65,000
Distributions to partners (14,459) (33,739) -- (48,198)
-------- -------- ------- --------
Balance at March 31, 2004 $256,739 $599,056 $ 4,800 $860,595
======== ======== ======= ========
The accompanying notes are an integral part of these
financial statements.
6
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by Northern
Border Pipeline Company without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they reflect all
adjustments that are, in the opinion of management, necessary for a fair
presentation of the financial results for the interim periods. Certain
information and notes normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
However, Northern Border Pipeline believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and the notes thereto
included in Northern Border Pipeline's Annual Report on Form 10-K for the year
ended December 31, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Northern Border Pipeline uses financial instruments in the management of
its interest rate exposure. A control environment has been established which
includes policies and procedures for risk assessment and the approval, reporting
and monitoring of financial instrument activities. As a result, Northern Border
Pipeline has entered into various interest rate swap agreements with major
financial institutions to hedge its interest rate risk.
Northern Border Pipeline records in accumulated other comprehensive income
amounts related to terminated interest rate swap agreements for cash flow hedges
with such amounts amortized to interest expense over the term of the hedged
debt. During the three months ended March 31, 2004, Northern Border Pipeline
amortized $0.4 million related to the terminated interest rate swap agreements,
as a reduction to interest expense from accumulated other comprehensive income.
Northern Border Pipeline expects to amortize comparable amounts in each of the
remaining quarters of 2004.
Northern Border Pipeline has outstanding interest rate swap agreements
with notional amounts totaling $225 million that expire in May 2007. Under the
interest rate swap agreements, Northern Border Pipeline makes payments to
counterparties at variable rates based on the London Interbank Offered Rate and
in return receives payments based on a 6.25% fixed rate. At March 31, 2004, the
average effective interest rate on Northern Border Pipeline's interest rate swap
agreements was 2.31%. Northern Border Pipeline's interest rate swap agreements
have been designated as fair value hedges as they were entered into to hedge the
fluctuations in the market value of the fixed rate debt issued in 2002. The
accompanying balance sheet at March 31, 2004, reflects a non-cash gain of
approximately $17.7 million in derivative financial instruments with a
corresponding increase in long-term debt.
7
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. COMMITMENTS AND CONTINGENCIES
On July 31, 2001, the Assiniboine and Sioux Tribes of the Fort Peck Indian
Reservation ("Tribes") filed a lawsuit in Tribal Court against Northern Border
Pipeline to collect more than $3 million in back taxes, together with interest
and penalties. The lawsuit relates to a utilities tax on certain of Northern
Border Pipeline's properties within the Fort Peck Indian Reservation. Since the
filing of the lawsuit, the Tribes have continued to assess annual utilities
taxes of approximately $1.8 million per year, which remain unpaid. Based upon
federal court decisions and other defenses, Northern Border Pipeline believes
that the Tribes do not have the authority to impose these taxes. The Tribes and
Northern Border Pipeline, through a mediation process, have held settlement
discussions and have reached a settlement in principle on pipeline right-of-way
lease and taxation issues, subject to final documentation and necessary
government approvals. This settlement grants to Northern Border Pipeline, among
other things, (i) an option to renew the pipeline right-of-way lease upon agreed
terms and conditions on or before April 1, 2011 for a term of 25 years with a
renewal right for an additional 25 years; (ii) a present right to use additional
tribal lands for expanded facilities; and (iii) release and satisfaction of all
tribal taxes against Northern Border Pipeline. If the settlement is executed by
the Tribes and approved by the Bureau of Indian Affairs, in consideration of
this option and other benefits, Northern Border Pipeline will pay a lump sum
amount of $5.9 million and an annual amount of approximately $1.5 million
effective April 2004 until April 2011. Northern Border Pipeline intends to seek
regulatory recovery of the costs resulting from the settlement. Northern Border
Pipeline is unable to predict at this time if or when all the approvals will be
obtained. Northern Border Pipeline believes that the outcome of this settlement
will not have a material adverse impact on its results of operations for 2004 or
financial position.
Various legal actions that have arisen in the ordinary course of business
are pending. Northern Border Pipeline believes that the resolution of these
issues will not have a material adverse impact on Northern Border Pipeline's
results of operations or financial position.
4. SUBSEQUENT EVENTS
Northern Border Pipeline makes distributions to its general partners
approximately one month following the end of the quarter. The distributions for
the first quarter of 2004 of approximately $56.2 million were paid on May 3,
2004.
On April 27, 2004, Northern Border Pipeline issued a $65.0 million cash
call to its partners to be paid on May 14, 2004. The funds will be used by
Northern Border Pipeline to repay a portion of its existing indebtedness.
8
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NORTHERN BORDER PIPELINE COMPANY
Northern Border Pipeline's discussion and analysis of its financial
condition and results of operations is based on its Financial Statements, which
are prepared in accordance with accounting principles generally accepted in the
United States of America. You should read the following discussion and analysis
in conjunction with the Financial Statements included elsewhere in this report.
OVERVIEW
There are several major business drivers that have an impact on Northern
Border Pipeline's business. These factors are discussed in the "Overview"
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations in Northern Border Pipeline's 2003 Form 10-K.
Firm transportation contracts representing approximately 30% of Northern
Border Pipeline's contracted capacity, or 778 million cubic feet per day
("MMcf/d"), expire late in 2004. Northern Border Pipeline has successfully
extended contracts for 88 MMcf/d with existing shippers and has begun a
regulatory mandated process involving existing shippers' right of first refusal
("ROFR") for the remaining available capacity. The ROFR process, which began on
April 1, 2004 and will conclude in mid-June 2004, is an auction process where
the current shipper, whose contracted capacity is expiring, is allowed to match
the best bid for that capacity. Any remaining unsold capacity is then offered on
a first come, first served basis. The success of the auction process will depend
on gas price comparisons between Alberta, Canada and Ventura, Iowa. Northern
Border Pipeline continues to believe that the near-term fundamentals of supplies
and markets support its ongoing success in re-contracting its capacity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain amounts included in or affecting Northern Border Pipeline's
Financial Statements and related disclosures must be estimated, requiring it to
make certain assumptions with respect to values or conditions that cannot be
known with certainty at the time the financial statements are prepared. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Any effects on Northern Border Pipeline's business, financial position or
results of operations resulting from revisions to these estimates are recorded
in the period in which the facts that give rise to the revision become known.
Northern Border Pipeline's significant accounting policies are summarized
in Note 2 - Notes to Financial Statements included in Northern Border Pipeline's
Annual Report on Form 10-K for the year ended December 31, 2003. Certain of
Northern Border Pipeline's accounting policies are of more significance in its
financial statement preparation process than others.
Northern Border Pipeline's accounting policies conform to Statement of
Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of
Certain Types of Regulation." Accordingly, certain assets that result from the
regulated ratemaking process are recorded that would not be recorded under
accounting principles generally accepted in the United States of America for
9
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
nonregulated entities. Northern Border Pipeline continually assesses whether the
regulatory assets are probable of future recovery by considering such factors as
regulatory changes and the impact of competition. If future recovery ceases to
be probable, Northern Border Pipeline would be required to write-off the
regulatory assets at that time. At March 31, 2004, Northern Border Pipeline has
reflected regulatory assets of $8.0 million, which are being recovered from its
shippers over varying periods of time.
Northern Border Pipeline's long-lived assets are stated at original cost.
Northern Border Pipeline must use estimates in determining the economic useful
lives of those assets. For utility property, no retirement gain or loss is
included in income except in the case of retirements or sales of entire
regulated operating units. The original cost of utility property retired is
charged to accumulated depreciation and amortization, net of salvage and cost of
removal.
Northern Border Pipeline's accounting for financial instruments follows
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires that every derivative instrument be recorded on the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement. At March 31,
2004, Northern Border Pipeline's balance sheet included assets from derivative
financial instruments of $17.7 million.
RESULTS OF OPERATIONS
Net income to partners increased $5.0 million for the first quarter of
2004, as compared to the same period in 2003. Northern Border Pipeline's net
income was increased by higher operating revenues and decreases in interest
expense.
Operating revenues increased $3.4 million for the first quarter of 2004,
as compared to the same period in 2003. The increase in Northern Border
Pipeline's revenues was due to several factors. Northern Border Pipeline was
able to generate and retain additional revenue from the sale of short-term
capacity, which represented approximately $1.8 million of the increase. The leap
year added an additional day of transportation, which approximated $0.9 million
of the revenue increase. Under a condition of Northern Border Pipeline's rate
case settlement, it was required to share interruptible transportation and new
services revenue with its shippers. This condition expired in October 2003 and
allowed Northern Border Pipeline to realize an additional $0.7 million of
revenue during the first quarter of 2004.
Interest expense decreased $1.6 million for the first quarter of 2004, as
compared to the same period in 2003, due to a decrease in Northern Border
Pipeline's average interest rate as well as a decrease in average debt
outstanding.
10
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
LIQUIDITY AND CAPITAL RESOURCES
DEBT AND CREDIT FACILITIES
Northern Border Pipeline's debt and credit facilities outstanding at March
31, 2004, are as follows:
Payments Due by Period
--------------------------
Current Portion
(Less Than Long-Term
Total 1 Year) Portion
-----------------------------------
(In Thousands)
$175 million Pipeline Credit
Agreement, average 2.01%,
due 2005 $ 74,000 $ -- $ 74,000
6.25% Senior Notes due 2007 225,000 -- 225,000
7.75% Senior Notes due 2009 200,000 -- 200,000
7.50% Senior Notes due 2021 250,000 -- 250,000
-------- ------- --------
Total $749,000 $ -- $749,000
======== ======= ========
Northern Border Pipeline has outstanding interest rate swap agreements
with notional amounts totaling $225 million that expire in May 2007. Under the
interest rate swap agreements, Northern Border Pipeline makes payments to
counterparties at variable rates based on the London Interbank Offered Rate and
in return receives payments based on a 6.25% fixed rate. At March 31, 2004, the
average effective interest rate on Northern Border Pipeline's interest rate swap
agreements was 2.31%.
Short-term liquidity needs will be met by operating cash flows and through
the Pipeline Credit Agreement. Long-term capital needs may be met through the
ability to issue long-term indebtedness.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities were $57.8 million in the
first quarter of 2004 as compared to $43.3 million for the comparable period in
2003. Increases in operating revenues and lower interest expense for 2004
contributed approximately $5.0 million to the increase between 2004 and 2003. In
addition, the first quarter of 2003 reflects lower cash flows from operating
activities of approximately $9.6 million primarily due to the discontinuance of
certain shipper transportation prepayments.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures were $0.3 million for the first quarter of 2004 as
compared to $1.9 million for the comparable period in 2003. The capital
expenditures for 2004 and 2003 were primarily related to renewals and
replacements of existing facilities.
11
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
Total capital expenditures for 2004 are estimated to be $16 million
primarily related to renewals and replacements of existing facilities. Northern
Border Pipeline currently anticipates funding its 2004 capital expenditures
primarily by borrowing under the Pipeline Credit Agreement and using operating
cash flows.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows used in financing activities were $40.2 million for the first
quarter of 2004 as compared to $47.8 million for the comparable period in 2003.
Distributions to partners were $48.2 million and $41.8 million in the first
quarters of 2004 and 2003, respectively. Effective January 1, 2004, each
quarterly distribution is equal to 100% of distributable cash flow as determined
by the previous quarter's earnings before interest expense, taxes other than
income, depreciation and amortization, less interest expense and less
maintenance capital expenditures.
A distribution of approximately $56.2 million was declared for the first
quarter of 2004 and paid on May 3, 2004.
Contributions from partners were $65.0 million in 2004. For 2003,
borrowings on long-term debt totaled $22.0 million. Total payments on debt were
$57.0 million and $28.0 million in 2004 and 2003, respectively.
UPDATE ON THE IMPACT OF ENRON'S CHAPTER 11 FILING ON NORTHERN BORDER PIPELINE'S
BUSINESS
As discussed in Northern Border Pipeline's Annual Report on Form 10-K for
the year ended December 31, 2003, on December 2, 2001, Enron Corp. and certain
of its wholly-owned subsidiaries filed a voluntary petition for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code. Refer to the
Form 10-K for the year ended December 31, 2003 for the full discussion of
impacts of Enron's Chapter 11 Filing on Northern Border Pipeline's business.
On March 31, 2004, Enron transferred its ownership interests in Northern
Plains Natural Gas Company and Pan Border Gas Company to CrossCountry Energy,
LLC ("CrossCountry'). In addition, CrossCountry and Enron entered into a
transition services agreement pursuant to which Enron will provide to
CrossCountry, on an interim, transitional basis, various services, including but
not limited to (i) information technology services, (ii) accounting system usage
rights and administrative support and (iii) payroll, employee benefits and
administrative services. In turn, these services are provided to Northern Border
Pipeline through Northern Plains. The agreement terminates on the earlier of a
sale of CrossCountry or December 31, 2004. The agreement may be extended by
mutual agreement of the parties and approval of the Official Committee of
Unsecured Creditors. Northern Border Pipeline has been advised by the management
of Northern Plains that they believe these services will continue to be provided
either through a new transition services agreement, from CrossCountry or through
agreements with third parties.
12
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
On January 9, 2004, the Bankruptcy Court approved as complete the amended
joint Chapter 11 plan and related disclosure statement ("Chapter 11 Plan"). The
Chapter 11 Plan has been submitted to the creditors for approval. A number of
creditors have filed objections to the Chapter 11 Plan. The Bankruptcy Court
rescheduled to June 3, 2004 a hearing on the approval. Under the Chapter 11
Plan, it is anticipated that if CrossCountry is not sold to a third party, as
permitted by the Chapter 11 Plan, its shares would be distributed directly or
indirectly to creditors and debtors.
PUBLIC UTILITY HOLDING COMPANY ACT ("PUHCA") REGULATION
As more fully discussed in Northern Border Pipeline's Annual Report on
Form 10-K for the year ended December 31, 2003, on March 9, 2004, Enron
registered as a holding company under the Public Utility Holding Company Act of
1935 ("PUHCA"). Under PUHCA, Northern Border Pipeline is a subsidiary of a
registered holding company. Immediately after Enron registered, the Securities
and Exchange Commission ("SEC") issued an order granting Enron and its
subsidiaries authority to undertake certain transactions without further
authorization from the SEC under PUHCA.
In April, Northern Border Pipeline entered into an amendment with the
lenders under its credit agreement that will allow Northern Border Pipeline, as
a subsidiary of a registered holding company, to continue to borrow funds as
needed.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The statements in this Quarterly Report that are not historical
information are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These forward-looking statements are identified as any statement that does
not relate strictly to historical or current facts. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and
assumptions. The future results of Northern Border Pipeline's operations may
differ materially from those expressed in these forward-looking statements. Such
forward-looking statements include the discussions in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" regarding Northern Border Pipeline's estimated capital
expenditures for 2004. Although Northern Border Pipeline believes that its
expectations regarding future events are based on reasonable assumptions within
the bounds of its knowledge of its business, it can give no assurance that its
goals will be achieved or that its expectations regarding future developments
will be realized. Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include
developments in the December 2, 2001 filing by Enron of a voluntary petition for
bankruptcy protection under Chapter 11 of the United States Bankruptcy Code,
regulation under PUHCA, ability to settle with the Fort Peck Tribes on
rights-of-way and tax issues, ability to control operating costs, ability to
market pipeline capacity on favorable terms, performance of contractual
obligations by the shippers, industry results, future demand for natural gas,
availability of supplies of Canadian natural gas, political and regulatory
developments that impact FERC proceedings involving Northern Border Pipeline,
Northern Border Pipeline's success in sustaining its positions in such
proceedings or the
13
PART I. FINANCIAL INFORMATION - (CONCLUDED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONCLUDED)
NORTHERN BORDER PIPELINE COMPANY
success of intervenors in opposing Northern Border Pipeline's positions,
competitive developments by Canadian and U.S. natural gas transmission peers,
political and regulatory developments in Canada, and conditions of the capital
markets and equity markets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NORTHERN BORDER PIPELINE COMPANY
Northern Border Pipeline's interest rate exposure results from variable
rate borrowings from commercial banks. To mitigate potential fluctuations in
interest rates, Northern Border Pipeline attempts to maintain a significant
portion of its debt portfolio in fixed rate debt. Northern Border Pipeline also
uses interest rate swaps as a means to manage interest expense by converting a
portion of fixed rate debt into variable rate debt to take advantage of
declining interest rates. At March 31, 2004 Northern Border Pipeline had $299.0
million of variable rate debt outstanding (approximately 40% of its debt
portfolio), $225.0 million of which was previously fixed rate debt that had been
converted to variable rate debt through the use of interest rate swaps. For
additional information on Northern Border Pipeline's derivative instruments, see
Note 2 to the Financial Statements, included elsewhere in this report.
ITEM 4. CONTROLS AND PROCEDURES
NORTHERN BORDER PIPELINE COMPANY
Those officers of Northern Plains that are the equivalent of Northern
Border Pipeline's principal executive officer and principal financial officer
have evaluated the effectiveness of Northern Border Pipeline's "disclosure
controls and procedures," as such term is defined in Rule 13(a)-15(e) and Rule
15(d)-15(e) of the Securities Exchange Act of 1934, as amended, within 90 days
of the filing date of this Quarterly Report on Form 10-Q. Based upon their
evaluation, they have concluded that Northern Border Pipeline's disclosure
controls and procedures are effective. There were no significant changes in
Northern Border Pipeline's internal controls or in other factors that could
significantly affect these controls, as of the end of the period covered by this
report.
14
PART II. OTHER INFORMATION
NORTHERN BORDER PIPELINE COMPANY
ITEM 5. Other Information
In Northern Border Pipeline's pending proceeding before the Federal Energy
Regulatory Commission ("FERC") on procedures for awarding capacity, an order was
issued on April 15, 2004 in which the FERC requested comments from interested
parties on whether the FERC's current policy on awarding available capacity to a
short-haul shipper appropriately balances the risks to the pipeline, bidding
shippers and other shippers on the pipeline. Comments are due by June 15, 2004.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 First Amendment to the Revolving Credit Agreement dated as of April
9, 2004 between Northern Border Pipeline, Bank One, NA and the
lenders named therein.
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Chief Financial and Accounting Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial and Accounting Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
1) Northern Border Pipeline filed a Current Report on Form 8-K, dated
February 9, 2004, including a copy of a press release announcing Enron's filing
with the SEC requesting authorization for, among other items, certain
transactions specific to Northern Border Partners and its subsidiaries,
including a request to permit Northern Border Partners to declare and pay
distributions. The information was furnished under Item 5 of the Form.
2) Northern Border Pipeline filed a Current Report on Form 8-K, dated
March 10, 2004, including a copy of Northern Border Partners, L.P. press release
announcing that the Securities and Exchange Commission granted Enron's request
on behalf of Northern Border Partners, L.P. to allow Northern Border Partners,
L.P. to declare and pay distributions. The information was furnished under Item
9 of the Form.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHERN BORDER PIPELINE COMPANY
(A Texas General Partnership)
Date: May 7, 2004 By: /s/ Jerry L. Peters
--------------------------------
Jerry L. Peters
Vice President, Finance and
Treasurer
16
INDEX TO EXHIBITS
Exhibits Description
- --------- ----------------------------------------------------------------
10.1 First Amendment to the Revolving Credit Agreement dated as of April
9, 2004 between Northern Border Pipeline, Bank One, NA and the
lenders named therein.
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Chief Financial and Accounting Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial and Accounting Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.